|
RUBICON TECHNOLOGY, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of
operations should be read together with our financial statements and related
notes appearing elsewhere in this Annual Report on Form 10-K. This discussion
and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. You should review the "Risk Factors" section of
this annual report for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements described in the following discussion and analysis.
OVERVIEW
We are an advanced electronic materials provider that develops, manufactures and
sells monocrystalline sapphire and other innovative crystalline products for
Light-Emitting Diodes ("LEDs"), radio frequency integrated circuits ("RFICs"),
blue laser diodes, optoelectronics and other optical applications. The emergence
of sapphire in commercial volumes at competitive prices has enabled the
development of new technologies such as high-brightness ("HB") white, blue and
green LEDs and highly-integrated RFICs. We apply our proprietary crystal growth
technology to produce high-quality sapphire products efficiently to supply our
end markets, and we work closely with our customers to meet their quality and
delivery needs.
We are a vertically integrated manufacturer of high-quality sapphire substrates
and optical windows that are used in a variety of high-growth, high-volume
end-market applications. During 2012 and 2011, our largest product sales were
six-inch polished sapphire wafers (substrates) for use in LED applications and
in Silicon-on-Sapphire ("SoS") RFICs. Two through four-inch diameter sapphire
cores were our second largest product sales category during 2012 and 2011, and
comprised the majority of our sales prior to 2011. Cores are sold to sapphire
polishers who make wafers for use in LEDs and blue laser diodes. We also sell
sapphire products used for windows and lenses in military, aerospace, sensor and
other applications. We have extended our technology, giving us the ability to
produce cores and wafers of up to twelve inches in diameter to support next
generation LED and RFIC production. In addition, we have developed the ability
to produce large diameter circular and rectangular sapphire windows for use in
various optical window applications.
Our revenue consists of sales of sapphire materials sold in core, as-cut,
as-ground and polished wafer forms in two, three, four, six and eight inch
diameters as well as optical materials sold as blanks or polished windows.
Products are made to varying specifications, such as crystal planar orientations
and thicknesses. We recognize research and development revenue in the period
during which the related costs and fees are incurred.
We sell our products on a global basis. The Asian, North American and European
markets accounted for 48%, 17% and 35%, respectively, of our revenue for the
year ended December 31, 2012, 87%, 9% and 4%, respectively, of our revenue for
the year ended December 31, 2011, and 90%, 8% and 2%, respectively, of our
revenue for the year ended December 31, 2010. Demand from the LED market was
very strong starting in 2010 continuing through mid-year 2011, particularly in
Asia where there is a high concentration of customers that participate in the
LED market. Demand for our products from the LED market slowed in the second
half of 2011 due to a slowdown in LED chip sales which resulted in a build-up of
inventory in the LED supply chain. The decrease in demand from the LED market
was partially offset by the increased strength of the SoS market. The demand for
sapphire substrates from the LED market is improving but excess sapphire
capacity added in the marketplace has kept pricing low throughout 2012 and going
into 2013. While we expect demand for LED chips to continue to strengthen
throughout 2013 with increased adoption of LED lighting, it is difficult to
predict how quickly the excess capacity will be absorbed and when the pricing
environment will improve. Demand for our products from the SoS market increased
considerably in 2012. However, there is some seasonality in that market which is
centered around the introduction of new smartphone models so we expect orders to
slow in the first half of 2013 with growth resuming in the second half of 2013.
We currently depend on a small number of suppliers for certain raw materials,
components, services and equipment, including key materials such as aluminum
oxide and certain furnace components. If the supply of
27
--------------------------------------------------------------------------------
Table of Contents
these components were to be disrupted or terminated, or if these suppliers were
unable to supply the quantities of raw materials required, we may have
difficulty in finding, or may be unable to find, alternative sources for these
items. As a result, we may be unable to meet the demand for our products, which
could have a material adverse impact on our business.
We manage direct sales primarily from our Bensenville, Illinois offices.
Substantially all of our revenue is generated by our direct sales force and we
expect this to continue in the future.
We manufacture and ship our products from our facilities in the Chicago
metropolitan area and from our facility in Penang, Malaysia. We have
approximately 237,000 square feet of manufacturing and office space in Batavia,
Franklin Park and Bensenville, Illinois and a 65,000 square foot facility in
Penang, Malaysia, which processes sapphire grown by us in our Illinois
facilities into finished cores and wafers. Our Malaysia facility currently
finishes the majority of our core production and can produce production volumes
of polished wafers. In March 2012, we acquired additional land in Batavia,
Illinois to expand our crystal growth capacity. We have not yet determined when
we will begin construction on this facility.
Financial operations
Revenue. Our revenue consists of sales of sapphire materials sold in core,
as-cut, as-ground and polished forms in two, three, four, six and eight-inch
diameters as well as optical materials sold as blanks or polished windows.
Products are made to varying specifications, such as crystal planar orientations
and thicknesses. We recognize research and development revenue in the period
during which the related costs are incurred.
We have focused on increasing sales of larger diameter substrates, which we
define as three inch or greater in diameter, as they generally yield higher
gross margins. Sales increased significantly across most product lines and
diameters for the year ended December 31, 2010, as demand for LED chips used for
backlighting LED televisions and computer screens drove strong demand and price
increases for our products. For the year ended December 31, 2011, we experienced
a significant increase in revenue in large diameter polished product lines as
one of our key customers was the first LED chip maker to move to a larger
diameter (6") platform in high volume production. In addition, increased pricing
for our core products resulted in higher revenue from these products for the
year ended December 31, 2011. However, in the fourth quarter of 2011, the LED
market began softening considerably with the maturing of the LED backlighting
markets, and the demand and pricing experienced a significant decrease across
most product lines. The weak market conditions continued throughout 2012 and for
the year ended December 31, 2012 we experienced a significant decrease in
revenue from our core products and large diameter polished product lines for the
LED market. The decrease in our large diameter product lines for the LED market
was partially offset by a strong SoS market. While we expect demand for the LED
chips to continue to strengthen throughout 2013 with increased adoption of LED
lighting, it is difficult to predict how quickly the excess capacity will be
absorbed and when the pricing environment will improve. The SoS market is
expected to grow in 2013; however, there is some seasonality in the market which
is centered around the introduction of new smartphone models. We expect orders
to slow in the first half of 2013 with growth resuming in the second half of
2013.
Historically, a significant portion of our revenue has been derived from sales
to relatively few customers. For the year ended December 31, 2012, our top two
customers accounted for approximately 67% of our revenue and for the years ended
December 31, 2011 and 2010, our top three customers accounted for approximately
69% and 46% of our revenue, respectively. Other than as discussed above, none of
our customers accounted for more than 10% of our revenue for such periods.
Although we are attempting to diversify and expand our customer base, we expect
our revenue to continue to be concentrated among a small number of customers. We
expect that our significant customers may change from period to period.
We recognize revenue upon shipment to our customers and from our government
contract as costs and fees are incurred. Delays in product orders or changes to
the timing of shipments could cause our quarterly revenue to vary significantly.
We derive a significant portion of our revenue from customers outside of the
U.S. In most periods, the
28
--------------------------------------------------------------------------------
Table of Contents
majority of our sales are to the Asian market and we expect that region to
continue to be a major source of revenue for us. All of our revenue and
corresponding accounts receivable are denominated in U.S. dollars.
Cost of goods sold. Our cost of goods sold consists primarily of manufacturing
materials, labor, manufacturing-related overhead such as utilities, depreciation
and rent, provisions for excess and obsolete inventory reserves, freight and
warranties. We manufacture our products at our Illinois and Malaysia
manufacturing facilities based on customer orders. We purchase materials and
supplies to support such current and future demand. We are subject to variations
in the cost of raw materials and consumables from period to period because we do
not have long-term fixed-price agreements with most of our suppliers. We
mitigate the potential impact of fluctuations in energy costs by entering into
long-term purchase agreements. Once our current agreements expire, if
electricity prices increase significantly, we may not be able to pass these
price increases through to our customers on a timely basis, if at all, which
could adversely affect our gross margins and results of operations.
Gross profit. Our gross profit has been and will continue to be affected by a
variety of factors, including average sales prices of our products, product mix,
our ability to reduce manufacturing costs and fluctuations in the cost of
electricity, raw materials and other supplies.
General and administrative expenses. General and administrative expenses ("G&A")
consist primarily of salaries and associated costs for employees in finance,
human resources, information technology and administrative activities, as well
as charges for outside accounting, legal and insurance fees and stock-based
compensation.
Sales and marketing expenses. Sales and marketing expenses consist primarily of
salaries and associated costs for employees engaged in sales activities, product
samples, charges for participation in trade shows and travel.
Research and development expenses. Research and development ("R&D") expenses
include costs related to engineering personnel, materials and other product
development related costs. R&D is expensed as incurred. We believe our R&D
expenses will generally increase as we continue to develop new products.
Other income (expense). Other income (expense) consists of interest income and
expense and gains and losses on investments and currency translation.
Provision for income tax. We account for income taxes under the asset and
liability method whereby the expected future tax consequences of temporary
differences between the book value and the tax basis of assets and liabilities
are recognized as deferred tax assets and liabilities, using enacted tax rates
in effect for the year in which the differences are expected to be recognized.
Our updated analysis of ownership changes that limit the utilization of the NOLs
shows no ownership change. Our previous analysis of ownership changes that limit
the utilization of the NOLs shows an ownership change but we believe that we are
not restricted in our ability to use the full amount of the NOLs. A full
valuation allowance was provided and no tax benefit was recorded until we could
conclude that it is more likely than not that our deferred tax assets will be
realized. During the twelve months ended December 31, 2011, we concluded that
based on the current level of sustainable profitability that generates taxable
income, it is more likely than not that our deferred tax assets will be
realizable. We recognized a tax benefit of $3.3 million to record current and
long-term deferred tax assets during the twelve months ended December 31, 2011.
With the release of the valuation allowance, we began recording federal and
certain state and non-U.S. income taxes attributable to the fiscal year's
pre-tax income. The reversal of the valuation allowance favorably impacts our
effective tax rate in 2011. The Illinois State Legislature has suspended the use
of NOLs for taxable years ending after December 31, 2010 and before December 31,
2011, and has limited the net operation loss deduction to $100,000 for the years
ending December 31, 2012 through December 31, 2014. In addition, Illinois has
increased the corporate income tax rate which unfavorably impacts our effective
tax rate. Our effective tax rate could fluctuate significantly on a quarterly
basis and could be adversely affected to the
29
--------------------------------------------------------------------------------
Table of Contents
extent earnings are lower than anticipated. Our effective tax rate could also
fluctuate due to changes in the valuation of our deferred tax assets or
liabilities, or by changes in tax laws, regulations or accounting principles, as
well as certain discrete items.
Stock-based compensation. The majority of our stock-based compensation relates
primarily to administrative personnel and is accounted for as a G&A expense. For
the years ended December 31, 2012, 2011 and 2010, our stock-based compensation
expense was $2.0 million, $2.5 million and $2.3 million, respectively.
RESULTS OF OPERATIONS
The following table sets forth our statements of operations for the periods
indicated:
Year ended
December 31,
2012 2011 2010
(in millions)
Revenue $ 67.2 $ 134.0 $ 77.4
Cost of goods sold 67.3 64.4 36.2
Gross profit (loss) (0.1 ) 69.6 41.2
Operating expenses:
General and administrative 9.0 11.3 9.9
Sales and marketing 1.7 1.7 1.3
Research and development 2.3 1.8 1.1
Loss on disposal of assets - 0.1 0.2
Total operating expenses 13.0 14.9 12.5
Income (loss) from operations (13.1 ) 54.7 28.7
Other income (expense) 0.5 (0.1 ) 0.3
Income (loss) before income taxes (12.6 ) 54.6 29.0
Income tax benefit (expense) 7.1 (16.5 ) 0.1
Net income (loss) $ (5.5 ) $ 38.1 $ 29.1
The following table sets forth our statements of operations as a percentage of
revenue for the periods indicated:
Year ended
December 31,
2012 2011 2010
(percentage of total)
Revenue 100 % 100 % 100 %
Cost of goods sold 100 48 47
Gross profit (loss) - 52 53
Operating expenses:
General and administrative 13 8 13
Sales and marketing 3 1 2
Research and development 3 2 1
Loss on disposal of assets - - -
Total operating expenses 19 11 16
Income (loss) from operations (19 ) 41 37
Other income (expense) - - 1
Income (loss) before income taxes (19 ) 41 38
Income tax benefit (expense) 11 (13 ) -
Net income (loss) (8% ) 28 % 38 %
30
--------------------------------------------------------------------------------
Table of Contents
Comparison of years ended December 31, 2012 and 2011
Revenue. Revenue was $67.2 million for the year ended December 31, 2012 and
$134.0 million for the year ended December 31, 2011, a decrease of $66.8
million. We experienced a decrease in revenue from our products sold to the LED
market. Revenue from the sale of sapphire cores, which are sold into the LED
market, for the year ended December 31, 2012 decreased by $52.6 million, of
which $42.3 million was attributed to lower pricing and $10.3 million was
attributed to lower volume. We also experienced lower revenue from sales of our
polished wafers by $14.4 million, which was the result of $36.9 million lower
sales of polished wafers to the LED market offset in part by a $22.5 million
increase in polished wafers sold to the SoS market. Of the $14.4 million
reduction in revenue from polished wafers, $16.9 million was attributable to
lower prices offset in part by an increase in volume of $2.5 million. We
experienced an increase in research and development revenue of $1.2 million as
we were awarded a contract with the Air Force Research Laboratory in July 2012
to produce large area sapphire slabs. Revenue with respect to this contract was
recorded as costs were incurred as well as a portion of the fixed fee for the
year ended December 31, 2012. The contract will continue for duration of three
years and the total value of the contract is $4.7 million. We also experienced
lower optical revenue of $1.0 million due to the decrease in sales for sensor
and instrumentation applications. While demand for polished wafers was strong
for the year ended December 31, 2012, prices were lower. We believe pricing will
slowly recover for sapphire cores as the excess capacity at sapphire producers
is gradually absorbed by increasing demand from the LED and SoS markets, but it
is difficult to predict exactly when and how quickly pricing will improve. Our
wafer sales are almost exclusively six-inch wafers which have not yet been
broadly adopted by the LED industry. Because the usage of six-inch wafers is
limited and competitors are eager to participate in this promising market, we
expect pricing of six-inch wafers to decline in the near term.
Gross profit. Gross loss was $40,000 for the year ended December 31, 2012 as
compared to a gross profit of $69.6 million for the year ended December 31,
2011, a decrease of $69.6 million. The decrease in gross profit is primarily due
to the reduction in revenue, which in turn is attributable to decreased pricing
for our products as well as lower utilization of our production facilities
attributable to the reduced demand from the LED market due to the buildup of
excess inventory in the supply chain. Due to changes in customers' product
specifications an excess and obsolete inventory reserve adjustment of $719,000
was recorded for the year ended December 31, 2012, which reduced inventory and
increased cost of goods sold as various items in stock were no longer in demand.
In addition, pricing for our small diameter core products declined throughout
2012 and in the fourth quarter of 2012 market prices fell below our carrying
cost in inventory. As a result we recorded a lower of cost or market adjustment
which reduced inventory and increased cost of goods sold by a net of $1.5
million for the year ended December 31, 2012. In addition, given the relative
strength of the six-inch market, we wanted to make sure our boule inventory was
capable of producing high-yield six-inch material. Consequently, we decided to
recycle some boules from inventory that might have produced lower than normal
six-inch yield. This added approximately $927,000 to cost of goods sold for the
year ended December 31, 2012.
General and administrative expenses. G&A expenses were $9.0 million for the year
ended December 31, 2012 and $11.3 million for the year ended December 31, 2011,
a decrease of $2.3 million. Our bad debt expense decreased by $1.9 million as we
made accommodations for the year ended December 31, 2011 to certain key
customers of our small diameter cores by agreeing to write off a portion of
their accounts receivable balances that did not re-occur in 2012. We also
experienced a decrease of employee compensation costs of $385,000, resulting
from a lower performance based bonus expense. In 2012, we also experienced
higher legal expenses of $488,000, offset partially by lower consulting expenses
of $268,000 and lower recruiting expenses of $102,000.
Sales and marketing expenses. Sales and marketing expenses were $1.7 million for
each of the years ended December 31, 2012 and, 2011. A slight increase of
$27,000 in sales and marketing expenses is attributable to additional employee
compensation costs primarily due to annual salary increases and employee stock
options expense.
Research and development expenses. R&D expenses were $2.3 million for the year
ended December 31, 2012 and $1.8 million for the year ended December 31, 2011,
an increase of $468,000. The increase is
31
--------------------------------------------------------------------------------
Table of Contents
attributable to higher employee compensation costs of $204,000 related to
increased headcount and salary increases, an increase in spending on research
projects of $186,000 and an increase in travel of $77,000.
Other income (expense). Other income was $450,000 for the year ended
December 31, 2012 and other expense was $118,000 for the year ended December 31,
2011, an increase in other income of $568,000. The increase was primarily due to
an increase of $719,000 from realized gains on foreign currency translation
partially offset by a $159,000 decrease in interest income on lower investment
balances.
Income tax benefit (expense). Income tax benefit was $7.1 million for the year
ended December 31, 2012 as compared to an income tax expense of $16.5 million
for the year ended December 31, 2011. Our projected effective tax rate, while in
a profit operating mode, is 30% to 35%; however, the rate of tax benefit accrued
while in a loss mode will typically be higher and will vary based on the
distribution of activity between our U.S. and Malaysia operations.
Comparison of years ended December 31, 2011 and 2010
Revenue. Revenue was $134.0 million for the year ended December 31, 2011 and
$77.4 million for the year ended December 31, 2010, an increase of $56.6
million. We experienced a significant increase in revenue across most product
lines and diameters in 2011 due to increased demand for our products, which led
to a large price increase in the first half of 2011. We directed most of our
additional crystal growth production capacity to support the growing demand for
six-inch polished wafers. As a result, we increased our sales of polished wafers
by $45.7 million primarily on higher volume of $55.1 million partially offset by
lower pricing of $9.4 million, as demand for these products increased in both
the LED and SoS RFIC markets. Revenue from the sale of core products for the
year ended December 31, 2011 increased by $8.0 million, of which $23.0 million
was due to an increase in pricing partially offset by a decrease of $15.0
million due to lower volume. We also had higher revenue of $3.1 million from
optical products due to increased sales of sapphire for sensor and
instrumentation applications.
During the second half of 2011, demand from the LED market weakened due to
excess inventory in the supply chain. As a result, prices for our products
declined. While demand for large diameter polished wafers was strong throughout
2011, the prolonged weakness in the LED market impacted pricing for this product
in the fourth quarter as customers for this product accumulated excess inventory
as well.
Gross profit. Gross profit was $69.6 million for the year ended December 31,
2011 and $41.2 million for the year ended December 31, 2010, an increase of
$28.4 million. The increase in gross profit is primarily attributable to higher
revenue due to increased core pricing in the first half of 2011 and higher
volume sales of polished wafers.
General and administrative expenses. G&A expenses were $11.3 million for the
year ended December 31, 2011 and $9.9 million for the year ended December 31,
2010, an increase of $1.4 million. Our bad debt expense increased by $1.7
million as we made accommodations to certain key customers of our small diameter
cores by agreeing to write off a portion of their accounts receivable balances.
Also, investor relations expense increased $728,000, primarily due to increased
outside support services and investor relations consulting, audit fees increased
$84,000, tax consulting expense increased $102,000 and executive travel expenses
increased $111,000, primarily due to increased frequency in travel outside the
U.S. G&A expenses for the Malaysia facility were also $202,000 higher as the
facility began to incur G&A expenses starting in the third quarter of 2010. The
G&A increases noted above were partially offset by a decrease of employee
compensation costs of $1.8 million, resulting from a lower performance based
bonus of $2.1 million, offset by an increase of $143,000 from annual salary
increases and expenses associated with issuance and exercise of employee stock
options and $158,000 of recruiting expenses.
Sales and marketing expenses. Sales and marketing expenses were $1.7 million for
the year ended December 31, 2011 and $1.3 million for the year ended
December 31, 2010, an increase of $391,000. The
32
--------------------------------------------------------------------------------
Table of Contents
increase in sales and marketing expenses is attributable to additional employee
compensation costs primarily due to annual salary increases, employee stock
options expense and additional sales hires to support expansion as well as
increased travel expense.
Research and development expenses. R&D expenses were $1.8 million for the year
ended December 31, 2011 and $1.1 million for the year ended December 31, 2010,
an increase of $727,000. The increase is attributable to higher employee
compensation costs of $246,000 and an increase in spending on research projects
of $458,000.
Other income (expense). Other expense was $118,000 for the year ended
December 31, 2011 and other income $346,000 for the year ended December 31,
2010, a decrease in other income of $464,000. The decrease was primarily due to
a $106,000 decrease in interest income on lower investment balances as well as a
$350,000 realized loss on foreign currency translation.
Income tax expenses. Income tax expenses were $16.5 million for the year ended
December 31, 2011, as our effective tax rate was 30.3% for the year. Due to our
tax net operating loss position, there were no income taxes for the year ended
December 31, 2010. During the year ended December 31, 2011, management concluded
that based on the current level of sustainable profitability that generates
taxable income, that it is more likely than not that our deferred tax assets
will be realizable. With the release of the valuation allowance, we began
recording federal and certain state and non-U.S. income taxes attributable to
the fiscal year's pre-tax income at the statutory rates adjusted for various tax
benefits that lower the rate.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations using a combination of issuances of
common stock and cash generated from our operations. On January 2, 2013, we
entered into a three year term agreement with a bank to provide us with a senior
secured credit facility of $25.0 million. The agreement provides for us to
borrow up to 80% of eligible accounts receivable and up to 35% for domestically
held raw material and finished goods inventory. Advances against inventory are
limited to 40% of the aggregate outstanding on the revolving line of credit and
$10.0 million in aggregate. We have the option to borrow at an interest rate of
LIBOR plus 2.75% or the Wall Street Journal prime rate prime rate plus 0.50%. If
we maintain liquidity of $20.0 million or greater with the lending institution,
then the borrowing interest rate options are LIBOR plus 2.25% or the Wall Street
Journal prime rate. Unused revolving line facility fee is 0.375% per annum. The
facility is secured by a first priority interest in substantially all of our
personal property, excluding intellectual property. We are required to maintain
an adjusted quick ratio of 1.40 to 1.00, maintain operating and other deposit
accounts with the bank or bank's affiliates of 25% of our total worldwide cash,
securities and investments, and we can only pay dividends or repurchase capital
stock with the bank's consent during the three year term.
As of December 31, 2012, we had cash and short term investments totaling $43.9
million, including cash of $7.9 million held in deposits at major banks, $11.6
million invested in money market funds and $24.4 million of short term
investments including commercial paper, corporate notes and bonds, U.S. treasury
securities, FDIC guaranteed certificates of deposit and common stock.
33
--------------------------------------------------------------------------------
Table of Contents
Cash flows from operating activities
Year ended December 31,
2012 2011 2010
(in millions)
Net income (loss) $ (5.5 ) $ 38.1 $ 29.1
Non-cash items:
Depreciation and amortization 12.0 9.7 6.0
Stock based compensation and other, net 2.0 2.5 2.5
Deferred taxes (6.3 ) 13.5 -
Excess tax benefits from stock based compensation (0.2 ) (1.4 ) -
Total non-cash items: 7.5 24.3 8.5
Working capital:
Accounts receivable 20.0 (14.0 ) (13.7 )
Accounts payable (4.0 ) 3.7 7.1
Other accruals (0.4 ) (1.6 ) 3.6
Inventories (24.2 ) (12.0 ) (4.4 )
Prepaid expenses and other assets 3.9 (13.9 ) (6.1 )
Total working capital items: (4.7 ) (37.8 ) (13.5 )
Net cash (used in) provided by operating activities $ (2.7 ) $ 24.6 $ 24.1
Cash used in operating activities was $2.7 million for the year ended
December 31, 2012. During such period, we generated a net loss of $5.5 million,
which included non-cash charges of $7.5 million, and a decrease in working
capital of $4.7 million. The net working capital change was comprised of a
decrease in accounts receivable of $20.0 million due to significant collections
from several key customers and an overall decreased accounts receivables balance
on lower revenues, an increase in inventory of $24.2 million primarily due to an
increase in our stock of raw materials and sapphire boules, and a decrease in
accounts payable of $4.0 million due to timing of payments. We also experienced
a decrease in other prepaid assets of $3.9 million, primarily related to a
decrease in the purchase of furnace construction and replacement parts and items
used in the polishing of wafers.
Cash provided by operating activities was $24.6 million for the year ended
December 31, 2011. During such period, we generated net income of $38.1 million,
which included non-cash charges of $24.3 million, and a decrease in net working
capital of $37.8 million. The decrease in net working capital was comprised of
an increase in accounts receivable of $14.0 million due to timing of
collections, a decrease in other accruals of $1.6 million consisting primarily
of a decrease in deposits of $1.1 million from customer prepayments, an increase
in prepaid expenses and other current assets of $13.9 million due to an increase
in purchases of furnace construction and replacement parts for both the Illinois
and Malaysia facilities, an increase in inventory of $12.0 million, which was
attributed to an increase in raw materials inventory as we continued to grow our
safety stock, as well as an increase in work-in-progress and finished goods
inventory due to lower demand of the two and four-inch core products in the
fourth quarter. This was offset by an increase in accounts payable of $3.7
million due to timing of payments.
Cash provided by operating activities was $24.1 million for the year ended
December 31, 2010. During such period, we generated net income of $29.1 million,
which included non-cash charges of $8.5 million, and a decrease in net working
capital of $13.5 million. The decrease in net working capital was comprised of
an increase in accounts receivable of $13.7 million due to higher sales and
volumes, an increase in accounts payable of $7.1 million due to increased
manufacturing production and timing of payments, an increase in other accruals
of $3.6 million consisting primarily of an increase in deposits of $1.1 million
from customer prepayments, and an increase in accrued payroll of $2.0 million
from increased headcount and bonus accrual. There was also an increase in
prepaid expenses and other assets of $6.1 million due to an increase in
purchases of furnace construction and replacement parts for both the Illinois
and Malaysia facilities, and an increase in inventory of $4.4 million, of which
$1.7 million was attributed to an increase in the stock of raw material.
34
--------------------------------------------------------------------------------
Table of Contents
Cash flows provided by (used in) investing activities
The following table represents the major components of our cash flows from
investing activities for the years ended December 31, 2012, 2011 and 2010:
Year ended December 31,
2012 2011 2010
(in millions) Purchases of property and equipment:
Machinery and equipment for crystal growth (5.1 ) (28.0 ) (14.9 )
Land and building improvements (2.4 ) (5.9 ) (25.8 )
Increase capacity in other areas (3.5 ) (14.3 ) (8.6 )
Total purchases of property and equipment (11.0 ) (48.2 ) (49.3 )
Proceeds from sale of investments, net of purchases 29.0 15.5 (25.4 )
Net cash provided by (used in) investing activities $ 18.0 $ (32.7 ) $ (74.7 )
Net cash provided by investing activities was $18.0 million for the year ended
December 31, 2012 and net cash used in investing activities was $32.7 million
and $74.7 million for the years ended December 31, 2011 and 2010, respectively.
In 2012, we used approximately $7.5 million to continue to complete and equip
our crystal growth facility in Batavia, Illinois and approximately $3.5 million
to increase capacity in other areas. This was offset by sales of investments
(net of purchases of investments of $5.3 million) of $29.0 million. In 2011, we
used approximately $33.9 million on expansion activities for building and
equipment for our crystal growth facility in Batavia, Illinois. We used
approximately $14.3 million to increase capacity for post crystal growth
operations, of which $10.0 million was used for continued equipment installation
in our facility in Penang, Malaysia. This was partially offset by sales of
investments of $25.0 million used to fund operations, capital spending and to
repurchase some of our capital stock. We purchased additional investments of
$9.5 million using investment earnings proceeds. In 2010, we used approximately
$49.3 million on expansion, including building and equipment for our new crystal
growth facility in Batavia, Illinois, and building and equipping our new post
crystal growth facility in Malaysia. We used proceeds from our common stock
offering completed on June 21, 2010 of approximately $55.4 million to purchase
investment securities. This was partially offset by sales of investments of
$30.0 million which were used to fund operations and capital spending.
We have purchased land to construct a second crystal growth facility in Batavia,
Illinois, but we have not yet determined when construction will begin. We
anticipate spending on capital expenditures in 2013 to be between $10.0 and
$15.0 million and will primarily be focused on investment in equipment to
produce patterned sapphire substrates and enhance our polishing platform.
Cash flows provided by (used in) financing activities
Net cash provided by (used in) financing activities was $250,000, ($4.0) million
and $62.8 million for the years ended December 31, 2012, 2011 and 2010,
respectively. Net cash provided by financing activities in 2012 was primarily
the result of excess tax benefits related to stock based compensation of
$160,000 and proceeds from the exercise of stock options of $72,000. Net cash
used in financing activities for 2011 reflects stock repurchases of $6.5
million, partially offset by excess tax benefits related to stock based
compensation of $1.4 million and proceeds from the exercise of options of
$742,000. Net cash provided by financing activities in 2010 reflects $61.7
million in net proceeds from the common stock offering completed June 21, 2010,
as well as proceeds from the exercise of stock options of $1.6 million partially
offset by an increase in restricted cash of $525,000.
Future liquidity requirements
We believe that our existing cash, cash equivalents, investments and anticipated
cash flows from operating activities will be sufficient to meet our anticipated
cash needs for at least the next twelve months. In addition, on
35
--------------------------------------------------------------------------------
Table of Contents
January 2, 2013, we signed an agreement with a bank to provide us with a $25.0
million senior secured credit facility. This facility will provide us with
additional operating cash flow flexibility. Our cash needs include cash required
to fund our operations, and the capital needed to fund our planned expansions in
the U.S. and Asia and investments in new product development. If the assumptions
underlying our business plan regarding future revenues and expenses change, or
if unexpected opportunities or needs arise, we may seek to raise additional cash
by selling equity or convertible debt securities. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our stockholders could be significantly diluted, and these
newly-issued securities may have rights, preferences or privileges senior to
those of existing stockholders. If we obtain additional debt financing or draw
on our credit facility, a substantial portion of our operating cash flow may be
dedicated to the payment of principal and interest on such indebtedness, and the
terms of the debt securities issued could impose significant restrictions on our
operations. If we are unable to obtain financing on terms favorable to us, we
may be unable to successfully execute our business plan.
Contractual obligations
The contractual obligations presented in the table below represent our estimates
of future payments under fixed contractual obligations and commitments at
December 31, 2012. Changes in our business needs as well as actions by third
parties and other factors may cause these estimates to change. Because these
estimates are complex and necessarily subjective, our actual payments in future
periods are likely to vary from those presented in the table. The following
table sets forth information relating to our contractual obligations at
December 31, 2012:
Payments due in
Less than 1-3 3-5 More than
Total 1 year years years 5 years
(in millions)
Operating lease obligations $ 2.3 $ 1.2 $ 1.1 $ - $ -
Purchase order obligations 1.1 1.1 - - -
Total contractual obligations $ 3.4 $ 2.3 $ 1.1 $ - $ -
OFF-BALANCE SHEET ARRANGEMENTS
During 2012, 2011 and 2010, we did not engage in any off-balance sheet
arrangements. We do not have any interest in entities referred to as variable
interest entities, which includes special purpose entities and other structured
finance entities.
[ Back To TMCnet.com's Homepage ]
|
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
